updated 11:22 pm EST, Sun November 17, 2013

Further evidence that Google subsidizes the cost of the Nexus 5 smartphone has emerged after the official off- and on-contract pricing for the popular Android handset was made public in Australia today. LG and Telstra have partnered to launch the Nexus 5 on the carrier's 4G LTE network with off-contract pricing listed at $696 and other retailers at $699 beginning late November for the 16GB model. The same handset is available to Australian customers through the Google Play online store at just $399, a price difference of $300. Australian customers have the option of purchasing the 32GB model through Google Play for just $49 more. As a point of comparison, the iPhone 5s retails from $869 outright in Australia.

While the Australian outright pricing is clearly designed to encourage customers on to Telstra's two-year plans, which start at $60 plus monthly handset repayments of $9, it does highlight that Google has adopted particularly aggressive pricing strategy for the Nexus 5 through its online stores, strongly suggesting that Google is indeed underwriting the price of the handset as has been widely speculated. Even if it is not subsidizing the Nexus 5, Google has already acknowledged that it does not sell the Nexus 5 to generate a profit. Google already gives away its Android operating system to any manufacturer who wants to install it on their devices free of charge, however, the actual retail pricing of the Nexus 5 suggests that Google is gambling on a long term strategy designed to drive Android handset adoption.

Google's longer term play with Android and the low-cost pricing structure of its Nexus devices through the Google Play store, is clearly aimed at widespread market adoption in order to push its ad-supported services into the hands of as many customers as possible. Recent market share figures show that Google's strategy is paying dividends from a market share perspective showing that it has achieved a global market share of over 80 percent. However, this dominance has as yet failed to deliver Google any financial return for its aggressive investment in the mobile platform, with its Android division running at a considerable loss.

Despite the relatively high upfront cost of the iPhone, Apple remains the dominant smartphone maker from a profit perspective, with its iPhone range continuing to dominate the profits generated by the global smartphone market, despite owning only 13 percent of the global smartphone market by comparison. The only Android handset maker to make substantial financial gains from Google's mobile operating system is Samsung, which dominates the Android handset market and profit share. However, as Google becomes increasingly dominant in the mobile space, it is possible that it could alter the advertising model on Android handsets to more aggressively push advertisements and services to customers, helping it to recoup its considerable investment in the open source platform.

Not really surprising, since Google isn't selling phones, it's selling the users of said phones to their advertisers. Giving away the phones at cost (or below) makes sense from a simple product-acquisition standpoint. There's a reason Google makes it so difficult to remove their own services from Android if you as an OEM want to use the free OS.

It does put Apple in a somewhat awkward position, however, since their primary business is selling phones to end-users rather than selling end-users to advertisers. The two companies are both OS makers, and Google is now in the phone business, too, but they have wildly different business models.

It still baffling how stupid people are for going Google/Android. Specially when proof that Google is taking a page right out of Amazon. Selling a kit at a loss to disrupt the market place. Thats not fair competition, thats cheating. Worse the users are an idiot to let Google make money of you as the user every time you use the devices.

I don't think it makes people idiots--it's a legitimate decision if you would prefer to concede some portion of your time, privacy, and personal data in order to save a few bucks on your phone, just like some people are willing to concede a few minutes of commercials to watch a television program while others would rather pay and watch it straight through uninterrupted. I make that decision myself with consumable media sometimes.

I think the issue is that the vast majority of Google users do not understand that this is the tradeoff they are making. They perceive Motorola/Google and Apple to both be companies building and selling phones with them as the end-user and customer. This doesn't make them stupid, just ignorant of the fact that for one of the two companies they are, in reality, the product, not the customer.

Apple does the same thing with their software: Final Cut and Logic are offered at a tenth of what they used to cost, which completely pulled the rug from under the feet of the industry. Mavericks and iOS being free puts pressure on Microsoft's business model.
Not to mention the included apps.